Recognition and Revaluation of Manufacturing Property

IAS 16 is constructed on the matter of Property, Plant and Equipment (PPE). PPEare the intangible assets that are used for the producing products, or also related in official reason for delivering services.For administrative purpose, PPE are likely to apply for additional than one secretarial phase because of their non-current nature (Tsalavoutas and Dionysiou,2014). Dynamics Co. Ltd has a manufacturing property.

As per ISA 16 Para 29, PPE are recognition at cost.

After Recognition:

The two permissible models for measuring the PPE as per Para 30and 31mentioned in IAS 16 are:

• Cost model
• Revaluation Model

At the end of reporting time, companies shall revalue their PPE with adequate regularity to certify that the carrying amount does not differ in materiality from what they are determined through their fair value. Revaluation is required when material difference exists between fair value and carrying value. Annual revaluation of assets is not required though fluctuation in value of asset prevails then the asset shall be revalued annually. In Para 35 of IAS16, treatment of accumulated depreciation is discussed. (Guay, Samuels and Taylor 2016).

Accumulated depreciation is reaffirmed with the modification in the gross carrying volume of the asset in regard to equate the revalue amount after the revaluation of asset. This is use by applying an index to regulate its standby cost. It is abolished in contradiction of the unrefined carrying amount of the asset and the net amount is restated to the asset’s revalued amount. This technique is frequently used for buildings.( Harris et al. 2013).

Dynamics Co. is not able to opt for cost model as revaluation of the asset is frequently done and the significant movement in the fair value as stated in the Para 34 of IAS 16. As per Para 36 in IAS 16, the revaluation model is used for the whole class of PPE to which that asset belongs must be re-valued.

In this instance, as there is a significant movement in fair value, the manufacturing property is to be re-valued to $70m. The relevant calculations and adjustments to the financial statements are shown below:

Particulars	$million
Cost	82
Less: Depreciation	2
Carrying Value	80

The above Carrying value of $80million is compared to the revaluation amount of $70million. Thus, a revaluation loss of $10 million is needed to be accounted for.

As per Para 39 and 40, the decreased carrying amount is recorded in profit and loss and the reduction is recorded in OCI which is not claimed in the revaluation arising out if excess difference of asset. (Younis et al. 2013).

Provisions for Legal Claims

The adjusted entry is:

Dr. OCI (SOCI) $6 million

Dr. Profit or Loss (SOCI) $4 million

Cr. PPE – Non-Current Assets (SOFP) $10 million

In Para 14 and 23 of IAS 37 discussed the conditions for the provision for its recognition. Those conditions have to be met for its recognition. It laid that recognition of a provision shall be only when:

• As result of past a company is having presently a legal or constructive obligation.
• There may be a possibility of settlement of an obligation through the financial profit that outflows of possessions embodying.
• A reliable forecast of an amount can be made for an obligation. This is only possible in the extreme unusual cases.

There must be not only a present obligation but also the probability of an outflow of resource embodying economic benefits for the settlement of an obligation for recognition of a liability. The outflow of resource or other event is dependent on the probability of occurrence. When the probability does not exist regarding the existence of obligation, it is stated as a contingent liability unless any economic benefit is embodied by the resource.

The number of similar obligations exists the probability of settlement is determined in considering the period of obligation as a whole. A provision is recognized if it is found that the probability of outflow of an item is small, it is obvious that resources shall be outflow for its settlement under the class of obligation as a whole.

In Para 36 of IAS 37, recognized amount for repair and maintenance shall be at the best estimate of the expenses required for the settlement of the present obligation at the end of the financial report. This is the amount paid by the company in a rational manner for the settlement of the obligation that is transfer to a third part. This estimation is made by the company`s management while maintaining all evidences including all requirements with an evidence of an individual professional.

IAS 37 states that a contingent liability is

• A probable obligation that have been arise from the events that was taken place in the past and their survival would be established only based on the occurrence or non-occurrence of one of the uncertain future events that is not as whole in control of the company.
• A present obligation raised from the past events but was not recognized due to:
• It is not possible that an outpouring of resources embodying monetary remuneration will be essential to reconcile the compulsion; or
• The figure of obligation is not being able to measure through adequate reliability.

The above supervision is stating that if any of the three stated terms that are required for the recognition of a provision is not being met and the item is a possible compulsion at the date of reporting then the item is stated as contingent liability. Contingent liability shall be disclose in the notes of financial statement and not in the balance sheet, until the possibility of an outflow of resource embodying monetary advantage is remote,  in such case it shall be ignored.( Barbu et al. 2014).

A dependent asset is a probable asset that arises from precedent events whose survival will be established only by the occurrence or non-occurrence of one or further uncertain upcoming events not entirely within the charge of the company. (Younis et al. 2013).

Importance of Disclosures for Property, Plant and Equipment

IAS 37 Provisions, Contingent Liabilities and Contingent Assets cover the food poisoning claims.

If there was a single claim, then the claims will be classified as a contingent liability, and no provision should be recognized in the SFP. This is because the outcome is possible not probable. However, because there are 500 claims and each one has a 40% chance of succeeding, then overall Dynamics would expect to lose 200 claims.

Therefore, a provision should be recognized in the SFP because:

• There is an obligation at the end of the reporting period due to a past event
• There is probable outflow of economic resources
• A reliable estimate can be made (200 claims at $5000 each)

As the claims not expected is being settled for another two years, the provision should be discounted using the risk related time value of money. (Tsalavoutas and Dionysiou 2014).

The provision should therefore be carried in the SFP at 31 December at:

Dr SPLOCI (retained earnings) $0.8 million

Cr Provisions (NCL) $0.8 million

As per Para 43 in IAS 16 the total cost of the item is depreciated separately that is significant with a cost in relation to the total cost of each part of an item under PPE.

Para 50 of IAS 16 states the allocation of the depreciable amount of an asset. It is on a systematic basis over the useful life of an asset. Para 51 of IAS 16 states the reviewing of residual value and the useful life of an asset at least each financial year. Any change in the figure is accounted as per IAS 8.As per Para 52 in IAS 16, recognition of depreciation is applicable till the assets residual value is not more than its carrying amount.(Paula et al. 2014).

As per Para 56 in IAS 16 , process of depreciation take place when an asset is being in its location and is put to use daily as per the requirement of the management. Ceasing of depreciation should take place at an early stage being sale or scrapping or being put as held for sale. Impermanent idle movement does not prevent depreciating the asset, as outlook financial reimbursement is being consumed not simply through practice but also all the way through deterioration and being out of date. Determination of useful life should be carefully done based on legal limits, use, expected wear and tear, maintenance programs, expected capacity, commercial innovations, expected outputs and technical. (Pacter 2014).

As per Para 60 to 62 in IAS 16  selected depreciation method needs to put light on the pattern on which the asset’s upcoming financial advantage are need to be utilized by the company. Company can choose the various methods of depreciation that is diminishing balance method straight-line method and production of unit’s method.(Cutruneo et al. 2014).The method selected by the company shall be revised at the end of the financial year at least.  As suggested in ISA 8 any change in the pattern of asset’s utilization for this depreciation method should be change and it shall be accounted. Depreciation is to be placed under profit and loss until it is capitalized keen on carrying sum of an additional asset such as one more item of PPE and stocks. A separate depreciation of an item of PPE is to be done with a cost charged in relation to the total cost. Like, airplane companies charge depreciation separately for the airplane cost and aircraft internal cost. (Marcus, Malen and Ellis 2013).

A depreciation method is also based on revenue generated from the activities, which include that the use of asset was not used in an appropriate way. The revenue generated by a movement that includes utilization of an asset normally reflects factors additional than the utilization of the fiscal reimbursement of the asset. Revenue can be affected due to the activities in selling, fluctuations in sales quantity and rate and through processes and inputs. Price of the revenue might be affected due to inflation that has no comportment ahead the method at which consumption of assets is done (Barbuet al.,2014.)

As per Para 60 and 65 of IAS 16 for determination of an item of PPE a company follows IAS 36 Impairment of Assets. The standard throw light that how an entity revise it carrying amount, determines the recoverable amount of the asset at time of its reorganization or reserving the reorganization for an  loss of impairment. At the time of receiving compensation, the result shall be placed under profit and loss these are done for compensation that are received from the third parties (Amiraslani, Iatridis and Pope, 2013.)

The carrying amount of an article of PPE shall be de-recognized as on discarding; or when no potential monetary reimbursement expected from it is utilize or discarding

Profit and loss is determined from the difference raised the net discard proceeds if persists or the carrying amount of the PPE. In accordance to IFRS 15, the mount earned by selling of assets is named as revenue.(Daske et al. 2013).

Firstly, class PPE is presented then the method of depreciation, base of measurement of the gross carrying charge, rate of depreciation, useful life of PPE and at last accumulated depreciation for the period at the time of beginning and end. (Ball and Shivakumar 2013).

The revalued figure shall be disclosed additionally to the discloser that is required by IFRS 13. Measurement of fair value is done on the basis of date of revaluation which is effective, involvement of independent valued is there or not, temporarily idle PPE’s carrying amount, for every revalued class of PPE, and recognition of the carrying amount is being carried under the cost model and fair value of PPE is considerably distinct from carrying amount as cost model is used. (Capkun, Collins and Jeanjean2016).

Reference:

Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research (CeFARR).

Ball, R., Li, X. and Shivakumar, L., 2013. Mandatory IFRS adoption, fair value accounting and accounting information in debt contracts. Fair Value Accounting and Accounting Information in Debt Contracts (September 11, 2013).

Barbu, E.M., Dumontier, P., Feleaga, N. and Feleaga, L., 2014. A proposal of an international environmental reporting grid: What interest for policymakers, regulatory bodies, companies, and researchers?: Reply to discussion of “mandatory environmental disclosures by companies complying with IAS/IFRS: The Case of France, Germany and the UK”. The International Journal of Accounting, 49(2), pp.253-262.

Barbu, E.M., Dumontier, P., Feleag?, N. and Feleag?, L., 2014. Mandatory environmental disclosures by companies complying with IASs/IFRSs: The cases of France, Germany, and the UK. The International Journal of Accounting, 49(2), pp.231-247.

Bertoni, M. and De Rosa, B., 2013. Comprehensive income, fair value, and conservatism: A conceptual framework for reporting financial performance.

Capkun, V., Collins, D. and Jeanjean, T., 2016. The effect of IAS/IFRS adoption on earnings management (smoothing): A closer look at competing explanations. Journal of Accounting and Public Policy, 35(4), pp.352-394.

Cutruneo, C.M., Oliveira, M.L., Ward, C.R., Hower, J.C., de Brum, I.A., Sampaio, C.H., Kautzmann, R.M., Taffarel, S.R., Teixeira, E.C. and Silva, L.F., 2014. A mineralogical and geochemical study of three Brazilian coal cleaning rejects: demonstration of electron beam applications. International Journal of Coal Geology, 130, pp.33-52.

Daske, H., Hail, L., Leuz, C. and Verdi, R., 2013. Adopting a label: Heterogeneity in the economic consequences around IAS/IFRS adoptions. Journal of Accounting Research, 51(3), pp.495-547.

Guay, W., Samuels, D. and Taylor, D., 2016. Guiding through the fog: Financial statement complexity and voluntary disclosure. Journal of Accounting and Economics, 62(2-3), pp.234-269.

Harris, P., Stahlin, W., Arnold, L.W. and Kinkela, K., 2013. A COMPREHENSIVE CASE STUDY: US GAAP CONVERSION TO IFRS. ISSN 2168-0612 FLASH DRIVE ISSN 1941-9589 ONLINE, p.121.

Marcus, A., Malen, J. and Ellis, S., 2013. The promise and pitfalls of venture capital as an asset class for clean energy investment: Research questions for organization and natural environment scholars. Organization & Environment, 26(1), pp.31-60.

Pacter, P., 2014. Global accounting standards-From Vision to reality. The CPA Journal, 84(1), p.6.

Paula, C.S., Bordin, I.A., Mari, J.J., Velasque, L., Rohde, L.A. and Coutinho, E.S., 2014. The mental health care gap among children and adolescents: data from an epidemiological survey from four Brazilian regions. PLoS One, 9(2), p.e88241.

Younis, M.Z., Jaber, S., Mawson, A.R. and Hartmann, M., 2013, I.A., Khatkar, M.S., Thomson, P.C. and Raadsma, H.W., 2016. A meta-assembly of selection signatures in cattle. PLoS One, 11(4), p.e0153013.

Tsalavoutas, I. and Dionysius, D., 2014. Value relevance of IFRS mandatory disclosure requirements. Journal of Applied Accounting Research, 15(1), pp.22-42.

Younis, M.Z., Jaber, S., Mawson, A.R. and Hartmann, M., 2013. Estimating the unit costs of public hospitals and primary healthcare centers. The International journal of health planning and management, 28(4), pp.320-332.